Autumn Statement analysis: Years more belt-tightening ahead

Chancellor George Osborne last week delivered an Autumn Statement which signalled even more years of austerity.

Chancellor George Osborne last week delivered an Autumn Statement which signalled even more years of austerity. Political editor David Williamson asks just how far we will have to tighten our belts.

Q: This era of austerity is like a cold I can’t shake or a mosquito I can’t swat. Surely the economy’s about to start growing and we get back to the days when chancellors stood on the Treasury steps and threw cash at a grateful public?

A: You’re out of luck, and so is the country. The economy had been predicted to grow by 0.8% this year but last week the Office for Budget Responsibility now says it will contract by 0.1%. The watchdog predicts that in 2016-17 the economy will be 3.6% smaller than it had earlier calculated.

Q: But I heard a forecast that the UK will be growing by 1.2% in 2013, hitting 2.8% in 2017. Doesn’t that mean we swap hair shirts for rhinestone jackets and celebrate a new era of prosperity?

A: If you’re a private sector entrepreneur you might be able to surf the expected ripples of growth to somewhere sunny, but the Government will remain cash-strapped for years to come. George Osborne has extended austerity measures for another year to 2017-18.

Page two: How will it affect you?

Q: Good grief! That would mean we’ll have been fighting the deficit for eight years – the equivalent of the lifespan of four hamsters. What’s gone wrong with the coalition’s plan to rescue the economy?

A: Quite a lot, according to the highly respected Institute for Fiscal Studies (IFS). It states: “Stripping out all the confounding changes, the Government is now expecting to borrow nearly £40bn more over just the last two years of this parliament than it expected back in March. Debt is due to peak at nigh on 80% of national income in 2015-16. It was supposed to be falling in that year, not peaking.”

Q: How is this fiscal winter going to affect people who depend on state welfare and benefits to get by?

A: Most working-age benefits will go up by just 1% – less than the rate of inflation. The UK Government aims to save £3.7bn from the welfare bill in 2015-16. Benefits for the disabled, pensioners and carers will not be affected. But disability charities claim changes to the Employment and Support Allowance mean more than 500,000 people will lose up to £400 over the coming three years. Gold medal-winner Baroness Grey-Thompson said: “The reality for most disabled people is you are poorer, live in worse accommodation and everything is more expensive.”

Q: Was there no good news in the 96 pages of the Autumn Statement?

A: You may be able to buy a few more bars of chocolate the next time you stop at a petrol station. The 3p rise in fuel duty expected in January has been scrapped, saving the typical driver £40 a year. And from April 1, the income tax personal allowance will go up by £235 to £9,440 – that’s on top of the £1,100 increase announced in the Budget. As a result, 13,000 people in Wales will stop paying income tax. Lib Dem Cardiff Central MP Jenny Willott says that in the Welsh capital alone 11,250 low-earners have stopped paying income tax since the Conservatives and her party took power in 2010.

Q: How can the Government afford to do this at a time when it’s having to squeeze welfare and cut deep into the budgets of many departments?

A: That’s a question smart minds are asking. Paul Johnson of the IFS said the £235 rise was “paltry” but expensive: “The total annual cost of the increases in the allowance, which will take just over two million people out of income tax, will exceed £9bn by 2014.”

Q: And meanwhile, I suppose, we’ll see no new cash for infrastructure?

A: Actually, you’d be wrong to think that. The Welsh Government will get an additional £227m of capital funding. Savings will have to be made in some areas but the Treasury estimates the Cardiff-based Government will be £194m better off as a result of the Autumn Statement.

Q: Was there any other good news for Wales?

A: Yes. Newport will get a share of a £50m pot for “ultra-fast” broadband and public wi-fi. And the Ebbw Vale and Haven Waterway enterprise zones will benefit from enhanced capital allowances for plant and machinery.

Welsh businesses, like those in the rest of the UK, will be helped in 2014 when the main rate of corporation tax falls from 22% to 21%.

But one of the most significant aspects of the autumn statement is that the idea of rolling out local pay rates in the public sector has been killed off. It’s claimed that on average people in the public sector in Wales earn around 18% more than those whose salaries do not come from the public purse. Critics of this situation claim this makes it harder for private sector companies to compete for staff, and some argue that more nurses and other staff could be hired if wages were lower. But there was widespread alarm that the pay of NHS workers and civil servants could be cut just at a time when Welsh high streets are starved of cash and families are trying to cope with rising energy costs.

Deputy Prime Minister Nick Clegg took apparent delight in declaring regional pay off the agenda. He said: “The case for regional pay has been looked at. “It’s been lost, and, for this coalition Government, that case is now closed.”

Mr Osborne took equal glee in knocking on the head the Lib Dem idea for a mansion tax. He said a new property tax would be “intrusive, expensive to levy, raise little and the temptation for future chancellors to bring ever more homes into its net would be irresistible.”

Q: Regional pay may have been stamped on but didn’t I hear that performance-related pay set by individual schools may be coming in for teachers?

A: Yes, and Welsh unions are very unhappy. Elaine Edwards of UCAC said: “The consequences of this will be acrimony at school level, an increasingly uncomfortable relationship between teachers and management, and a destructive divisiveness between schools whose ability to pay the highest salary will determine who gets the best teachers.”

Q: The scene seems set for the mother of all showdowns. And what about Wales’ 640,000 pensioners – are they happy?

A: The basic state pension will rise by £2.70 to £110.15 a week a week from April. Politicians are increasingly respectful of the power of the so-called grey vote and will not want to ignite the wrath of millions of grandparents. But there are growing suspicions that pensioners, too, will face more of a squeeze in the coming years as civil servants and ministers search for savings.

Government spending as a share of GDP is predicted to slide from 48% in 2009-10 to just 39.5% in 2017-18. It is hoped the deficit will fall from 7.9% of GDP to 1.6% by 2017-18, but the Treasury will be looking under the sofa cushions for spare cash throughout this time.

The IFS’ Mr Johnson said: “There are big choices on health and welfare, crucially surely including benefits for pensioners, still to be made. And it is hard to believe that there won’t be more tax rises to come.”

Q: Brrr! Surely it’s time to crack down on vagabond tax-dodgers who squirrel cash overseas.

A: There are high hopes that a treaty with Switzerland will address this problem and funnel us £5bn over six years. It’s also hoped oodles of cash (£3.5bn) will be raised by the sale of 4G phone licences, and there are predictions UK Government departments will “underspend” by £7.5bn – but a few nasty surprises in any of these areas would make life very difficult for the chancellor.

Q: Well, with borrowing due to fall from £108bn this year to £31bn in 2017-18, at least the UK’s reputation as a bastion of fiscal prudence is safe?

A: Mr Osborne takes the type of pride in Britain’s AAA credit rating that a champion boxer feels for his prize belt. But the rating will be reviewed in the new year amid concerns about the UK’s debt, a missed borrowing target and signs of yet more trouble in the economy. There was shock on Friday when it was revealed factory output fell 1.3% in October – much worse than the 0.2% decline analysts expected.

Q: I suspect if George Osborne poured me a drink I’d have a hard time judging whether my glass was half-empty or half-full. Does his Autumn Statement leave me better or worse off?

A: People at the top and the bottom of the earning spectrum are being pinched hardest, while those in the upper middle may feel a little better off in the months ahead. Labour are on the warpath with claims that life is just going to get tougher for hard-working families. The party claims a single-earner family on £20,000 led by a couple with two children will lose £279 a year, and that new working mums who take maternity leave will miss out on £180. Shadow Chancellor Ed Balls has been quick to point out that 60% of people affected by the below inflation benefit rises have a job and are not “work-shy”.

It’s also possible one million more people may be paying the 40p rate of income tax in 2015 because the threshold is only going up by 1%. When the country goes to the polls in 2015 people will be tired of austerity but they won’t expect any future government to start writing cheques. Instead, they will put the party in Government they trust to make the wisest cuts.

Next: Will you be better off?

AUTUMN STATEMENT: WILL I BE BETTER OFF?

LOW EARNERS

Good News: From April, you will pay no tax on the first £9,440 of your income, which could make a big difference to part-time workers. The Wales Office expects 13,000 Welsh people to stop paying income tax.

Bad News: Most benefits will only rise by 1% for the next three years. This will be well below the rate of inflation so family budgets may get tighter.

MIDDLE EARNERS

Good News: The higher personal income tax allowance will be welcome, as will the scrapping of the planned 3p rise in petrol duty and the £240 increase that can be put into the tax-free Isa.

Bad News: The House of Commons Library has backed up Labour research showing a family with two children that’s headed by a single-earner couple and has an income of £20,000 will be £279 worse off.

HIGH EARNERS

Good News: The inheritance tax threshold will rise by £4,000 to £329,000 and investors will see the amount they can gain before being taxed increase to £11,100.

Bad News: The threshold at which people start paying 40% income tax is only going up by 1%, and from 2014 anyone earning £41,865-plus will be taxed in this bracket.

PENSIONERS

Good News: Wales’ 640,000 pensioners will benefit from a £2.70 a week increase in the basic state pension from April.

Bad News: The tax-free amount that can be paid into pensions annually has been cut from £50,000 to £40,000.

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